Due Diligence
The thorough investigation a buyer conducts into a business before completing an acquisition — covering financials, legal, operations, customers, and more.
What is Due Diligence?
Due diligence is the process by which a buyer verifies everything the seller has represented about the business. It typically begins after the LOI is signed and runs for 30–90 days.
This is where deals either get confirmed, renegotiated, or fall apart entirely. A well-prepared seller can sail through due diligence; an unprepared seller can watch a deal collapse — or face a painful price reduction.
What Buyers Examine
Financial Due Diligence
- 3 years of financial statements (P&L, balance sheet, cash flow)
- Tax returns to verify reported income
- Revenue breakdown by customer, product, and channel
- Analysis of margins, working capital, and capex
- Quality of earnings (QoE) report — often commissioned by buyers in larger deals
Legal Due Diligence
- Corporate structure and ownership records
- Contracts with customers, suppliers, and employees
- IP ownership (trademarks, patents, software, domain names)
- Outstanding litigation or regulatory issues
- Leases and property agreements
Operational Due Diligence
- Key employee agreements and dependencies
- Supplier relationships and concentration
- Technology stack and systems
- Processes and documented SOPs
Customer Due Diligence
- Customer concentration analysis
- Churn rates and renewal history
- Key customer relationship dependencies
- Net Promoter Score or satisfaction data
How to Prepare for Due Diligence
The best sellers have a virtual data room ready before the LOI is signed. A data room is an organized online folder (typically in Google Drive, Dropbox, or a purpose-built tool like Datasite) containing:
- Financial statements and tax returns
- Customer contracts and revenue schedules
- Employee agreements and org chart
- Supplier contracts
- IP registrations and assignments
- Corporate documents (articles, operating agreement, cap table)
Disclose proactively. Buyers will find issues — the question is whether they find them from you (with context) or on their own (which damages trust). Disclose problems early with a clear explanation and, where possible, a solution.
Due Diligence Pitfalls for Sellers
- Slow responses — delays give buyers time to get cold feet or find new concerns
- Disorganized records — signals poor management and increases perceived risk
- Surprises — undisclosed issues discovered mid-diligence often lead to price reductions
- Over-involvement — if the owner has to personally answer every question, that's a red flag about transferability
After Due Diligence
If due diligence goes well, both parties move to the definitive purchase agreement — the legally binding document that governs the sale. If issues are found, they may result in a price adjustment, escrow holdback, or specific representations and warranties.